Paul Keating urges Labor to stick with capital gains tax overhaul and avoid exemptions that would hurt economy

Paul Keating has urged Labor to stick to its guns on controversial changes to capital gains tax, warning exempting commercial assets from the changes would further “distort” the economy.

Small business and the start-up sector are fighting the Albanese government over its plans to shift the 50% capital gains tax discount to an inflation-based model, part of a suite of tax reforms announced in this month’s federal budget.

Ahead of Labor introducing legislation for the changes to parliament on Thursday, Australia’s 24th prime minister said settings in place since 1999 had badly hurt the productive economy, as financial resources were diverted to housing, particularly established property.

“This had a major and deleterious impact on investment and with it productivity,” Keating told Guardian Australia on Wednesday.

“The government has done the right thing on housing but it is imperative that the CGT change doesn’t create a new and further distortion to the economy by exempting all other assets, particularly commercial ones.

“The shift in capital taxation under the new arrangements is so marginal that no entrepreneurial initiative is likely to be thwarted by it.”

Paul Keating in 1995. The former Labor leader introduced capital gains tax in the 1980s, before it was amended by the Howard government. Photograph: The AGE/Fairfax Media/Getty Images

The architect of major economic reforms in the 1980s and 1990s, Keating said correcting the balance in taxation between capital and labour should “be and remain the over-riding objective of policy, of the new policy.”

The treasurer, Jim Chalmers, has warned changes introduced by the Howard government overcompensated investment in established housing, and under-compensated other kinds of investment.

“We didn’t think it made a lot of sense to replace one big distortion with another kind of distortion,” he said.